(| MERGER RESTRUCTURING AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

PRESENTED BY CHESANG, CAROLYNE J - D/6 l/P/8495/98

A Research project submitted in partial fulfilment of the requirements of the masters Degree in Business Administration.

FACULTY OF COMMERCE UNIVERSITY OF NAIROBI APRIL, 2002 DECLARATION

I declare that this project is my original work and has not been presented lor a degree in any other University

Signed 04 Chesang, C.J Candidate

This project has been submitted for examination with my approval as the l niversity Supervisor.

Signed:

A. kithinji Lecturer Department of Accounting Faculty of Commerce UNIVERSITY OF NAIROBI DEDICATION

This paper is dedicated to my parents, brothers and sisters, my sister’s family (The Tiren’s) and my fiancee, Eliud.

COD BLESS VOU.

I ACKNOWLEDGMENT

The M B A programme has been a long and taxing journey, the successful completion of which has been the result of the support and encouragement received from many quarters.

I am indebted not only to people who gave me the inspiration to take up this MBA programme but also to those who gave me the guidance and assistance on what I have reported here.

Special thanks go to my supervisor, Mrs. Angela Kithinji, Faculty of Commerce, Department of Accounting for her continued advice, guidance, availability, encouragement, useful criticisms and suggestions through the project work. Without her meticulous guidance this project would not have materialized. I also wish to thank all the teaching, administrative and support staff of the faculty for their unrelented support through the programme period.

I also want to recognize m y 1998 - 200 0 M BA class for their companionship and audience throughout the MBA programme. I cannot forget my colleagues; j. Kabiru, E. Kokwaro, V. Obare and Mr. B wire for their useful interactive discussions and encouragement, my workmates at KNH and Harambee Avenue branches for their continued encouragement.

Special thanks to my employer; NBK without whom I would not have managed to enrol in the programme.

M y family, The Tiren’s family who patiently and conscientiously guided and encouraged me.

I specially also want to thank my fiancee, Eliud for his support and encouragement. Vou were very resourceful.

Those who assisted me with the typing; Susan, Lilian, my niece (Eva) and Njeru who assisted in m any ways.

All those who in one way or the other gave me support. Please receive my heartfelt thanks.

May God bless you all abundantly. I would not have managed through my own efforts were it not for you.

O ur God Almighty made all these possible. M ay His name be praised!

II TABLE OF CONTENTS

PAGE Dedication...... I Acknowledgement...... II Abstract...... VII

CHAPTER ONE INTRODUCTION 1.1. Background...... 1 1.2. Statement of the Problem...... 3 1.3. Objective of the Study...... 5 1.4. I mportance of the Study...... 5

CHAPTER TWO LITERATURE REVIEW 2.1. Background of Kenya’s Banking System...... 7 2.2. Banking Crisis...... 7 2.3. Bank Restructuring...... 9

2.3.1. Defining Systemic Bank Restructuring...... 9 2.3.2. Bank Restructuring Approaches...... !...... 9 2.4. Merger as a Bank Restructuring Approach...... 11 2.4.1. Bank Mergers...... 11 2.4.1.1. Theories of Mergers...... 2.4.1.2. Empirical Studies on Mergers...... 15 2.5. Review of Kenyan Literature...... 17 2.6. Measures of Financial Performance...... 18 2.6.1. Profitability Analysis...... 18 2.6.2. Capital Adequacy Ratios...... 19 2.6.3. Long-term Solvency...... 20 2.6.4. Asset Credit Quality Ratios...... 20 2.6.5. Interest Rate Risk Position...... 21 2.7. Limitations of Financial Ratios...... 21 2.8. Earnings and Profit Performance Emphasis...... 21

III CHAPTER THREE

RESEARCH METHODOLOGY 3.1. Research Design 3.1.1. Population...... 22 3.1.2. Data Collection...... 22 3.1.3. Data Analysis...... •...... 22 3.1.4. Assumptions and Interpretations...... 23

CHAPTER FOUR 4.0. Data Analysis and Interpretations...... 24 4.1. Introduction...... 24 4.2. Trend in Performance...... 24 4.2.1. Solvency Ratios...... 25 4.2.2. Profitability and Earnings Ratio...... 28 4.2.3 Capital Adequacy...... 31

t

CHAPTER FIVE 5.0. Summary of Findings, Conclusions, Limitations and Suggestions for F urther Research, Recommendations to Policymakers...... 32 5.1. Summary of Findings and Conclusions...... 32 5.2. Limitations of the Study...... 37 5.3. Suggestions for Further Research...... 38 5.4. Recommendations to Policymakers...... 38

GLOSSARY ...... 40

REFERENCES ...... % A P P E N D IC E S...... *4 Appendix I List of Merged Financial Institutions: 1994 - 2000 Appendix II Ratio Analysis of Merged Financial Institutions Appendix III Charts - Trends in Financial Performance Appendix IV Tables - Performance of the studied financial Institutions in absolute figures IV LIST OF TABLES AND CHARTS List of Tables Table 1. Return on Equity: Net Income to Total Equity Table 2. Return on Assets: Net Income to Total Assets Table 3 Equity Multiplier: Total Assets to Total Equity Capital Table 4. Asset Utilisation: Total Income to Total Assets Table 5. Profit Margin : Net Income [[ before tax ” / d otal Income T%_ Table 6. Long-term Solvency : Total Liabilities / l otal Assets Table 7. Long-term Solvency: Shareholders Funds to Total Assets Table 8. Capital Adequacy: Shareholders Funds to Total Assets Table 9. Total Assets Table 10. Total Liabilities Table 11. Shareholders Equity Table 12. Total net operating Income . Table 13. Net Income before Tax Table 14. Total Deposits Table 15. Total Income List o f Charts 1 - 3. Trend in Commercial Banks Financial Performance

V ABBREVIATIONS. CBK Central Bank of Kenya MER Monthly Economic Review NBFI Non Bank Financial Institutions TNB Transnational Bank Ltd NBK National Bank of Kenya Ltd NIC Bank - National Industrial Credit Bank Ltd STD Standard Chartered Bank Ltd IMF International Monetary Fund

VI ABSTRACT This study set out to achieve the following objective:

Assess the financial performance of Kenyan Banks restructured using the merger approach. Profitability and earnings, capital adequacy and solvency indicators were used to determine implications of merger restructuring'on performance of commercial banks.

Secondary data obtained from Financial statements and various publications was used in the study. The data was then analysed with the aid of Microsoft (MS) Excel statistical package. t

On financial performance evaluation of the merged institutions, it was observed that though there is improved performance in some cases, the extent of the contribution cannot be said to be significant.

The general observation is that other than for indicators with legal requirements by the Central Bank of Kenya (Capital adequacy and Solvency ratios), merger restructuring has not improved the financial performance of the majority of merged institutions as indicated by the profitability and earnings ratios. It is however important to note that the ratios that gave a higher indication on financial performance of the merged banks are those that have legal implications: Capital adequacy and Solvency. Profitability ratios however indicate that the majority of the merged hanks reported a decline in financial performance.

VII CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND In the 1980's and early 1990's, several countries in developed, developing and transition economies experienced several hanking crises requiring a major overhaul of their banking systems (IMF 1998). Often, problems have domestic causes, such as; a weak banking supervision, political interference and inadequate capital. Further, a countries banking system may be outmoded and in need of rebuilding; as in the case of many developing countries like Kenya. Outside forces such as fall in the prices of a Key export product or Commodity can ignite or worsen a crisis (Dziobek and t Pazarbasioglu (1998).

Countries have taken different approaches in resolving banking crisis with varied , degrees of success. Different policies, strategies and tools of reforms have been used in an attempt to foster liquidity, solvency and proper functioning of a sound stable financial system particularly due to the dynamic environment under which it operates (IMF, 1998). In many economies, bank restructuring has been used as a proactive measure or as a reactive measure.

Due to the central role of a developed banking system in our economy, it is necessary to identify a restructuring technique that can be used to forestall bank failures. Further, the need to strengthen the financial system has been emphasized by the recent bank crisis. The structure of any country’s financial system is of great importance to the impact on its economic activities. Indeed, no Government will in this sense permit widespread bank failure; hence, the focus on bank restructuring so that plans are not forged under crisis conditions. (Dziobek and Pazarbasioglu, 1998). There is no optimal, unique or scientific methodology in bank restructuring as it depends on a country’s legal situation, social, political and economic framework (De Juan (1991). De Juan (1991) and Popiel (1988) highlighted various bank restructuring techniques to assist policy makers and the World Bank-in considering various ways to restructure banks under different sets of conditions. Restructuring options include; regulatory forbearance, across the board solutions, rehabilitation; sale/inerger and liquidation. Restructuring mechanisms on the other hand include market based solutions (privatisation), carving out bad loans, bank hospitals (Deposit protection fund), change of guard and phoenix from the ashes (consolidation).

This study will analyse bank mergers as a restructuringoption in Kenya. Mergers from a legal standpoint and for purposes of this study means; “any transaction that forms one economic unit from two or more previous ones” (Copeland and Weston, 1992). According to Pandy (1999), merger is said to occur w hen two or more companies combine into one company. One or more companies may merge with an existing company or may merge to form a new company. It may take two forms; absorption and consolidation. Absorption is a combination of two or more companies into an existing company. All companies except one lose their identity. Merger through consolidation on the other hand is a combination of two or more companies into a new company. In this form of merger all companies are legally dissolved and a new entity is created. Ross, Westerfield and JafFe, 1996 define a merger as the absorption of one firm by another. These techniques have been prevalent particularly following crisis.

Recent episodes have seen banks absorbing their subsidiaries (Non Bank F inancial Institutions). Non-Bank Financial Institutions comprise a mixed bag of institutions. They mobilise savings and facilitate financing of activities. In this sense, they play an important dual role in the financial system. Infact, they complement the role of commercial banks, filling the gaps in their range of services (Vittas, 1997). Indeed, the distinction between commercial Banks and NBf I s has become blurred.

The study will empirically investigate merger as a restructuring practice in the Kenyan Banking Sector and its implication on Bank performance.

An adequate role of the Government in analysis, providing fiscal resources, adopting the necessary legal and regulatory measures and setting overall framework is necessary for any form of restructuring (Claessens, 1998). 2 1.2. STATEMENT OF THE PROBLEM

In the context of widespread insolvency, restructuring is a necessary ’‘medication” to restore health to individual banks and the financial system. In view of the importance of the Banking system, it is necessary to avoid fiscal and monetary cost of permanent subsidization of an ailing system without sound hanking. Waiting for the recovery of the economy to outgrow banks problems may not work unless the problem is shallow. Further, tightening prudential controls may not be an adequate measure to restore financial stability. (IMF, 1998)

Kenya has experienced banking problems since 1986 culminating in major bank failures (37 failed Banks as at 1998) following the crises of; 1986 - 1989, 1993/1994 and 1998. The number of banks absorbing their subsidiaries or merging with other banks have equally increased (CBK, 2000).

% In a Banking crisis; depositors, lenders to banks and owners of bank capital all lose confidence and seek to simultaneously salvage their resources by withdrawing them. Restructuring of insolvent banks is therefore a must for the regulatory framework and supervisory system to be respected as a source of discipline and sound banking.

The cost of bank failures is colossal; hence, the necessity to “Get out of the dark (Sheng, 1991). Indeed, it is a “ wake-upcall’ to improve performance: restore solvency; improve profitability and rebuild confidence as most financial systems were asleep prior to the financial crisis. (Senbet, 1998). Bank mergers have been prev alent in Kenya as strategy tools for weak financial institutions. Ailing banks require quick action by supervisory authorities to salvage them before they become insolvent.

Bank restructuring approaches that have been applied in Kenya are numerous and this study may not be able to adequately address all of them within the stipulated time. More so, merger technique has been one of the popular restructuring approaches used by Kenyan Banks in the recent past. No study has been undertaken to assess w hether 3 there is an improvement in financial performance following restructured using the merger approach.

4 1.3 OBJECTIVE

OF THE STUDY To determine implications of merger restructuring on financial performance of commercial banks in Kenya.

1.4. IMPORTANCE OF THE STUDY The study is expected to be of importance to: 1. The Central Banb of Kenya: There have been calls for more proactive approaches to forestalling bank failures. As the country’s Banking Sector regulator and supervisor, the central Bank will be challenged to critically assess methods used to restructure banks with an aim of improving solvency, profitability and rebuilding confidence. The bank has not effectively discharged this duty in the past. It will serve as a guide in restructuring viable banks. It will also aid in building better legal, accounting, regulatory and supervisory systems. 2. Government Policy Mahers: The monetary Authorities and the Treasury will benefit from the study when designing policies which should facilitate strengthening of the financial system. The study recognises the importance of the financial system in the economy. It will therefore guide these policy makers on how to respond to banking crisis. 3. Academic Researchers: The study will stimulate further interest in this area of restructuring. Little has been explored in the case ofbank mergers despite the application of the technique in the recent past. It is aimed at filling existing knowledge gap. t 4. Investors, Lenders, Managers and Labour Unions: Restructuring tools have been used in various economies experiencing bank problems. I he success of the techniques largely depend on the support of these stakeholders. They will thus recognise available options to strengthen the financial system, hence, support particularly in case of viable banks.

5 5. Bank executives, Business executives and the general Public: This group will also benefit from the study. The importance of a sound financial system cannot be overemphasised. The contribution of these stakeholders towards successful restructuring is therefore important once they recognise the impact of the option on the performance of the already affected Financial Institutions.

6 CHAPTER TWO LITERATURE REVIEW

2.1 BACKGROUND OF KENYA'S BANKING SYSTEM Banks in Kenya are established under the Bunking Act Cup 488 and regulated under the provisions of the Centrul Bunk of Kenya Act Cup 491 of the laws of Kenya. The Bunking Act Purt II Sec. 4(( l) & Ogives the Minister of Finance powers to licence any institution intending to carry out hanking business in kenya on recommendations from Central Bank of Kenya. Purt IV Sec. 32 o f the Act gives Central Bank of Kenya exclusive inspection powers on any licensed banking institution to ensure that they conform with the law and the prudential guidelines issued by the Central Bank of Kenya from time to time. This is in line with one of the principal objectives of the Bank as outlined in the Central Bank of Kenya Act of 1996 part II Sec. 4 (2) which states The Bunk shull foster liquidity, solvency and proper functioning of u stuhle rnurket based financial system”. This objective can be largely achieved by restructuring financial institutions with an aim of strengthening them and subsequently the entire financial system.

The financial system has grown in size and structure since independence due to policies pursued by the authorities. The legal framework: Centrul Bunk Act and Banking Act have also been amended to reflect the policies and growth of the industry. I his was particularly so following liberalisation period 1992 - 1994. I he objective was to create a conducive environment for Banks to operate and protect stakeholders.

2.2. BANKING CRISIS

The Banking industry is so prone to crisis due to its unique characteristics, hence, a special policy interest in preventing and dealing with such crisis (Gavin and 1 lousmann 1998). The proliferation of large scale banking crises has therefore raised widespread concern, as banking crises disrupts flow of credit to households and enterprises reducing investment and consumption and possibly forcing viable firms into

7 bankruptcy. Banking crises may also jeopardise the functioning of payment systems and by undermining confidence in domestic financial institutions, they may cause decline in domestic savings and/or a large scale capital outflow. Finally, a systemic crisis may force sound banks to close their doors (Vittas, 1997). In most countries, policy makers have responded to banking crisis with various interventions, ranging from loose monetary policy to the bail out of insolvent financial institutions with public funds; as in the case of state owned banks in Kenya (IMF 1997). Even when they are carefully designed, rescue operations have several drawbacks which include; High budgetary costs, Possibility of inefficient banks remaining in business creating expectations of future bailouts thereby reducing incentives for adequate crisis management by banks, Weakening managerial incentives as is often the case, thus forcing healthy banks to bear the losses of ailing institutions, Inflammatory loose monetary policy to prevent banking sector losses and; in countries with an exchange rate commitment, possibility of trigger of a speculative attack against the currency (Kunt and Detragiache,( 1997).

Preventing the occurrence of systemic banking sector problems is undoubtedly a major concern ofpolicy makers and understanding the mechanisms that are behind the surge of banking crises has been a major issue throughout the world. I his is also the case considering the colossal cost of bank failures. Bank, regulators are faced with the challenge ofstrengthening the financial system by all means. The application of various restructuring approaches following 1989, 1993 and 1998 financial crises in Kenya confirms this fact. It is important to note that merger technique may not necessarily be used as a restructuring tool to revive problem banks. The consummation of mergers entail other motives other than that of averting bank failure.

8 2.3. BANK RESTRUCTURING

2.3.1. Defining Systemic Banb Restructuring

Systemic Bank restructuring aims to improve bank performance; restore solvency and profitability, improve the banking systems capacity to provide financial intermediation between savers and borrowers and restore public confidence (IMF (1998). Governments began to restructure their banking sectors mainly aimed at improving an enabling environment and rebuilding confidence (Claessens, 1998) • Restoring Financial institutions to viability means stopping accrual of unpaid interest, eliminating borrowers and refinancing of non-performing loans and making provisions for the bad debts. Institutions that have no capital must be recapitalised, merged with healthy institutions, or closed if they have no further role to play in the financial system. (Long , 1991).

2.3.2. Banb Restructuring Approaches For one reason or another, banks fail. They fail because of liquidity, insolvency, mismanagement, sudden shocks to the economic system; such as violent fluctuations in interest rates or exchange rates or outright frauds (De Juan, 1991). Sheng (1991) observes that reasons for failure can beat Micro or Macro Economic levels. Depending on the severity of the problems of the failing banks, the remedial measures open to central bank vary. Further, the method used depends on a country’s specific situation and the strength of the financial system.

Claessens, (1998) identifies two types of bank restructuring approaches; financial and operational restructuring. The author argues that these approaches focus on policy and legislative clarity; competitive framework; interrelationship with capital markets, development of regulatory and supervisory structures and capacities and benchmarking of Global standards and practices at macro-level. 9 At Micro/Bank level, restructuring relate to clear assessment of operational and portfolio conditions; strategies to deal with loan workouts and had assets (asset disposition recovery of trusts) (Claessens ,1998).

Dziobek and Pazarbasioglu, (1998) on the other hand ha ve classified Bank restructuring approaches into two categories: structural measures and financial measures. Structural measures refers to a situation which include: central Bank as sole restructuring agency; Central bank liquidity support; loan workout units (public or bank-based); Closure of insolvent banks; merger of insolvent banks; privatisation (where applicable); Enterprise restructuring to improve creditors and Tw inning with Foreign banks. Financial measures on the other hand includes; Bonds (eg. Exchanged for bad loans); New equity (eg. bought by Government); deposit based instruments (eg Deposit insurance Fund) and Owner - Management market incentives.

Restructuring refers to several related processes:* recognising financial losses; restructuring financial claims and operational restructuring of banks. I he main elements of sustainable corporate restructuring are broadly four fold; Improving the enabling environment, developing the institutional and legal framework for restructuring; enhancing capacity for restructure and a greater role for capital markets (Claessens, 1997).

Despite the positive encouraging developments in restructuring of financial systems; the stock market development and banking development in Africa are grossly incomplete (Nadeem, Hanswald and Senbet 1997). Severe informational problems have compounded this (Senbet, 1997).

The success of a country’s resolution program; “fixing the roof while the sun shines entails resolution or control of financial crisis using appropriate measures. It depends on the Government’s ability to clean up losses of distressed banks and restructure (that is recapitalize, merge, liquidate etc) insolvent banks (Senbet, 1997).

10 2.4. MERCER AS A BANK RESTRUCTURING APPROACH Any form of restructuring should aim at making the system sound, transparent and more efficient. The process of adopting the best practices continues especially after the Asian Crises. (IMF, 1998). • Restructuring using merger technique has been prevalent in Kenya. The technique has been undertaken to strengthen the financial systems so that they achieve efficiency, productivity and profitability. It tends to be a long term measure.

2.4.1. BANK MERGERS Business combinations include mergers, acquisitions, take -overs, amalgamation and consolidation.

Mergers and acquisitions still seem to the most prudent way foward for the small medium sized banks to remain profitable and compete effectively. Central Bank of Kenya has continued to encourage and sensitize the banking industry on the need for mergers. In the year 52000 for example, the merger ofsix institutions was approved. Further, the amendment of Section 9 of the Banking Act now comprehensively covers the interests of institutions which undertake merger as a restructuring option. Many previous legal hurdles in the transfer of assets and liabilities between the merging institutions have been removed to hasten the merger process and reduce costs. Merger is an important feature of structural changes. The first wave of Bank Mergers in Kenya occurred in 1993 w hile the second in 1998 and continues to the present day (CBK 52000).

At the global scene overall efficiency in banking was probably retarded over the years. The small banks were too dependent on narrow' business bases and found it difficult to prosper due to competition. This contributed to bank failures in 1980's (Jayamaha, 1997)

11 Many countries in South East Asia have then encouraged mergers of finance companies and other Financial institutions. The global trends appear to lx* towards the consolidation rather than proliferation of banking institutions. Governments are paying increasing attention to avoid failure of big financial institutions as the repercussions are difficult and costly in underdeveloped financial markets (Jayamaha, 1997).

The importance of bank restructuring has been reiterated in establishing financial system soundness. Merger technique has been one of the tools applied by authorities to achieve effective mobilisation and efficient allocation of resources in the recent past Apart from recapitalization of state-owned banks, commonwealth countries have encouraged mergers to restore stability of their financial systems by removing obstacles to mergers of finance companies and hence banks. Increasing efforts have also been made in Kenya, Ghana, Malaysia, Sri Lanka to attract foreign investments and technology of their financial sector (Jayamaha, 1997). The aim is to restore solvency, increase Profitability and rebuild public confidence.

The Korean Government proposes to classify troubled financial institutions into three categories to separate the healthy ones from those that should be closed or merged and those needing capital increases. To encourage bank mergers, the capital for a Deposit Insurance Agency in Korea will be increasing to provide money to compensate healthy banks taking over ailing ones. (Jayamaha, 1998).

The recently formed Financial Services Authority (FSA) in the UK has expressed its concern over the mergers of banks, F inance institutions and Accounting Companies arguing that there is already a high degree of concentration;• hence, less competition # # (Jayamaha (1998).

12 2.4.1.1. Theories of Mergers There is strong evidence indicating that corporate take overs generate net aggregate gains, resulting in benefits to the acquired firms’ shareholders and no losses to the acquiring firms shareholders (Jensen and Rubeck, 1983). The banking industry experienced a series of mergers and acquisitions throughout the 1990s. The cause of many of these mergers and acquisitions has been the desire to achieve greater cost savings and revenue generation and to improve the bank’s overall financial position and solvency (Cornett and Saunders, 1999). Like any other form of restructuring technique, it aims at improving bank performance - that is to restore solvency and sustainable profitability; improve the banks capacity to provide financial intermediation between savers and borrowers and restore public confidence (IMF, 1998). Mergers are generally initiated for strategic or financial reasons. A number of hypothesis have been advanced to explain the source of gains from merger. The performance of merged firms is expected to increase due to the following reasons/expectations: (Weston and Copeland, (1992), Hawawini and Swary (1990). 1. Efficiency Operations: Theories under this category are the most optimistic about the potential of mergers for social benefits. It involves removal of incumbent inefficient management and potential reduction on distribution costs resulting from adoption of efficient technology (synergy).The future cash-flow stream generated by the merged firms is expected to exceed the sum of the future cash flow streams of the two combined individual firms if the acquirer can reduce the cost of its product after the merger. This will be possible if the merger generates synergies via economies of scale and scope, reduced

distribution and marketing costs, divestiture of« redundant assets.

I nefficient management hypothesis argues that the performance of the combined unit may improve if the acquirer removes inefficient management from the target firm. Required managerial skills and capabilities is expected to encourage efficiency.

13 Merger is believed to be a strategic decision that lead to maximisation of growth and sustaining v iable firms. Growth leads to increase in shareholders value; higher profits. Increased capacity and capability can be achieved making the combined firm achieve competitive advantage (Hawawini and Swary, 1990). • c2. Information & Signalling hypothesis argues that if the acquirer has privileged information indicating that the target firm is undervalued and takes advantage by purchasing the target for less than its value, then the shareholders of the acquiring firm will benefit from the merger.

3. Agency problem?. Jensen and Meckling (1976) formulated the implications of Agency problems. An Agency problem arises when managers own only a fraction of the ownership shares of the firm. The agency theory suggests that when the market for managers does not solve the Agency problem, the market for firms or merger activity will come into play. It therefore suggests that merger activity is a method of dealing with the agency problem. This motivates managers to work more vigorously hence expected improved results.

4. Market Power happens if the acquirer can raise the price of its products after the merger. This is possible if the merger reduces the number of competing firms and increases its market share in the industry (Stigler, 1964). Improved general performance is expected.

5. Tax Considerations : This has been a major stimulating factor for merger activity. The cumulative liability of the combined unit is expected to be smaller than the sum of the tax liabilities of the two individual firms. By merging with a profitable company, the surviving firm can temporarily fully utilise losses effectively. Reduced tax income of the acquired firm boosts the earnings of the combined firm relative to that of the independent firms.

14 2.4.1.2. Empirical Studies on mergers Early Literature on mergers suggest synergistic motives as the main rationale behind merger activity.

Empirical Studies of mergers (pre-1973) used comparative Studies of firm performance to test synergy for mergers. Kelly (1967) was the first to study merger profitability using measures including security price changes. The sample consisted 4i1 firms matched in 21 pairs of one merging and one non-merging firms. He compared pre-and post merger performance based on five(5) measures of profitability: Percentage change in stock prices, price earnings ratio(PIE ratio), earnings per share (EPS), sales per share and Profit margin. He used pre-merger period calculated average returns (5 years) and (5 years) post-merger using stock returns. He concluded that operational restructuring as a result of merger activity positively affects profitability due to renewed attention to business, improved management and accounting legal regulatory systems, better credit assessment and approval techniques, reduced branches and staffing levels. These were aimed at improving performance and to restore confidence of the financial system. The main objective of restructuring is to achieve this goal.

A similar study was conducted by Lev and Mandelker (1972) on 69 firms. I hey compared the performance of merging firms using profitability measures for 5 pre­ merger and 5 post-merger years. They concluded that the market value of the acquiring firms rose on average by 5.6% (significant a 10% level).

(Campro and Leone, 1991)-Uruguay experienced severe% crisis in 1982 that undermined the stability of the financial sector with far reaching implications in the Banking Structure and real economy in the subsequent 5 years. Following the crises, Bank mergers developed.

Coopers & Lybrand (1993) undertook a study in 1992 which combined in depth interviews of senior Managers of 50 large UK firms which had been involved in

15 mergers. Although the study concluded that 54% of the mergers were financially unsuccessful, the causes of failure were attributed to factors which include: management attitude, lack of post acquisition integration planning, lack of knowledge by the bidder of the target and its industry, poor management and management practices in the target firm.

Ayerbach & Reishus (1967) compared actual mergers over 1968 -1983 with a control group of non-merging firms. Asquith, Brunner & Mullins (1993) examined and assessed the profitability of merger programs. Newbould, Stray & Wilson (1976) examined UK active acquirers and (1967 - 1973) found some evidence that companies undertaking mergers earned a higher rate of return than those that relied on internal growth. They were however unable to identify a positive relationship between the level of merger activity and profitability.

Ulton (1974) examined 39 Companies which had undertaken large and/or persistent mergers in the period 1954 - 1965. He concluded that the most that can be said is that there is no evidence from the sample that merger intensive firms have higher profitability than the coverage industry.

Singh (1975) concluded that firms that acquired others were less profitable. Kouhm (1975) observes that acquiring firms tended to be faster growing than firms in their respective industries. This being the case, a merger of these two firms is expected to lead to improved performance. According to Newbould (1971) the major reason for mergers appeared to be the desire by management to reduce the level of uncertainty in t the business environment.

The East Asian Crisis has underscored the importance of strong domestic policies and institutions in enabling countries to integrate successfully in the global financial community. From this crisis, a debate has emerged on structural policy reforms needed at both national and international levels to restore financial stability and mitigate future

16 crisis. I hese reforms include strengthening financial sectors, establishing sound business env ironment and adopting adequate mechanisms for social protection (Masood, 1998).

The merger technique was used in the US Savings and Loan Crisis (1970-90), US Banking Sector Crisis (1982-90), Malaysia (1985-88), Sheng A (1991).

2.5. REVIEW OF KENVAN LITERATURE Little has been done to clearly assess the success of banks restructuring tools used in Kenya. Following banking crisis experienced however, the major challenge for the authorities has been to try and contain crisis situation after realising that a sound banking system is critical for both economic growth and for economic stability. Kenya has experienced three (3) financial crises since 1980s; 1989, 1993, and 1998 , which led to tightening of the regulatory framework by introducing changes in the Banking Act aimed at enhancing efficient operations of the Industry in conformity with the primary objectives of the International Basle Committee on banking supervision. (CBK, 1998).

Banking crisis contributes to a substantial weakening of the Macro-economic performance with major re-adjustment policies. It leads to increase in share of non­ performing loans, increase in losses ( due to foreign exchange exposure, interest rate mismatch, contingent liabilities) and decrease in value of investment causing solvency problems in the financial system; hence, liquidation, mergers, use of Central Bank as lead Agency to restructure banks (CBK, 2000). It is expected that viable restructured banks will have improved performance.

Measures available in crisis situation depend on a Country’s legislative framework. Long-term measures include; liquidation, mergers, restructuring of activities, recapitalisation, while short-term/emergency measures include lender oflast resort and Central Bank intervention in Management of ailing institutions.t Measures undertaken

17 should positively influence the performance of the affected institutions.(Claessens, 1998)

2.6 MEASURES OF FINANCIAL PERFORMANCE Performance is the ability to sustain income, stability and growth. It is a measurement of relative investment (Walter, 1968) and can be relative to one of the following factors: Assets, capital adequacy, liquidity, liabilities, number of employees and other size measures.

According to Pandy (1997), Brealey and Myers (1996), Thygerson (1995) the following are the measures of financial performance:

2.6.1 Profitability Analysis This is the most common measure of financial performance. The measures are used to assess how well management is investing the firms total capital and raising funds. Profitability is generally the most important to the firms and shareholders. Profits serve as cushion against adverse conditions such as losses on loans, or losses caused by unexpected changes in interest rates. Consequently, creditors and regulators concerned about failure also look to profits to protect their interests although the measures ignore firm’s risk.

Profits depend on three (3) primary structural aspects of financial institutions: F inancial leverage, Net interest margin and non- portfolio income sources. Return on equity (RoE) and Return on Assets (RoA) are the most commonly applied profitability ratios used to assess Financial performance. The ratios are defined as:

18 (i) RoE = Net income : Total equity capital (%) It measures overall profitability of financial institutions per dollar of equity. (ii) RoA = Net income : Total assets (% ) This ratio measures profit generated relative to the financial institution’s assets. The authors also identified other ratios used in assessing profitability. They include: (iii) Equity multiplier = Total Assets: Total equity capital (x) It measures the extent to which assets of the financial institution are funded with equity relative to debt. (iv) Profit margin = Net income : Total operating income (%) Profit margin measures the ability to pay expenses and generate net income from interest and non-interest income. (v) Asset utilisation = Total operating income : Total assets Asset utilisation measures the amount of interest and non-interest income generated per dollar of total assets. Other ratios used to assess Financial Performance and used in this study are: (Thygerson) ( 1995):

t 2.6.2 Capital adequacy ratios They relate to the firms overall use of financial leverage. Generally, firms with high financial leverage will experience more volatile earnings behaviour. It indicates the extent to which an institution’s capital base covers the risks inherent in its operations. Important capital adequacy ratios include: (i) Shareholders’s equity to Total assets (ii) Shareholders equity to Total loans (iii) Shareholder’s equity to Total customer deposits (Gearing ratio). The study concentrates on shareholder’s equity to Total assets ratio.

19 2.6.3. Lcno-term Solvency Solvency refers to the ability of an enterprise to survive over a long period of time. It is the same concept as liquidity except that it is for long term rather than short term. Long terms means more than one year. Ratios to assess long-term solvency are measures of company riskiness.

Ratios include: (I) Total liabilities to Total Assets The ratio measures the proportion of assets financed by creditors. The higher the percentage of debt financing the riskier the business

(II) Shareholder’s equity to Total assets It indicates the proportion of assets financed by the owners of funds.

(III) Shareholder's equity Total loans This ratio indicates the proportion of loans covered by the owners of funds.

There is no absolute ratio that has been put forward theoretically to be a good level of solvency. Total liabilities to Total Assets and Shareholder’s funds to

Total Assets have been used in this study. Other ratios used to assess financial performance though not used in the study include (Thygerson) (1995):

2.6.4 Asset Credit Cuality Katies - Measure ef Credit Elsk Asset quality refers to credit risk embodied in the institutions asset portfolio eg, performance of loans, investment in treasury bills and other securities.

20 2*6.5 IliN i

Financial statements present one of the basis of predicting financial performance of a firm and provides a w^ay of reducing uncertainty facing creditors and other stakeholder. The profit and loss statements and the balance sheet were used to extract data for analysis.

2.8: Earninas and Prefit Performance Emphasis The banking sector management has shifted their focus to profitability because of the recent developments in the sector which include: the need for additional capital adequacy funds implying profits should be boosted as a main source, increased need for provisioning of bad and doubtful debts, need for funds for expansion and modernization/technological advancement to serve customers better and attain competitive advantage. This requires efficiency and intensive capital investment, high volatility of interest rates and exchange rates and intensive competition following liberalisation of the sector are other factors considered. Altman (19t>8) concluded that profitability ratios are the most critical factors in a firms ability to avoid failure. Other Financial performance indicators have however been used in the study.

21 C H A P T E R 3

3.1 RESEARCH DESIGN

3.1.1 Population The population of interest in this study comprise banks that merged over the period 1993 to 2000. A census of all merged financial institutions within the period 1993 - 2000(Appendix I) were used in the study to investigate the suitability of mergers in improving performance of these financial institutions in terms of sustainable profitability, capital adequacy and long-term solvency.

3.1.2 Data Collection Secondary data was used for purposes of this study. The following sources ofdata were used in the study for analysis purposes for the period 1993-2(XX):

• Published annual Reports of Accounts for the population of interest from the Head Offices of the institutions, Central Bank of Kenya, Daily Newspapers, Nairobi Stock Exchange, Capital Markets Authority. • Bank supervision annual reports from Central Bank of Kenya • Monthly Economic Reviews of Central Bank of Kenya. • Statistical bulletins from Central Bank of Kenya

3.1.3 Data Analysis The study focussed on financial performance of the merged financial institutions. I hree categories of critical financial ratios were used in this study. I hese include; Profitability and earnings ratios; capital adequacy and long-term solvency ratios. I he comparati\ e analysis for the two periods; pre-merger and post-merger was then conducted on the basis of the analysis.

For the analysis of capital adequacy, the study concentrated on shareholders funds to total deposit liabilities ratio (Yeager and Seitz (1989). Long-term solvency

22 concentrated on shareholders funds to total asset ratio and total liabilities to total asset ratios. Profitability and earnings was measured using Return on Equity (RoE), Return on Assets (RoA); Asset utilisation Ratio, Equity multiplier and Profit Margin Ratio.

The data has been derived from Financial Statements of these financial institutions and ratios calculated using the listed performance indicators as recommended by Thygerson (1995), Gardener and Mills (2000) and Brealey and Myers (1991).

3.1.4. ASSUMPTIONS AND INTERPRETATIONS • The three financial ratios; Capital adequacy, long-term solvency and profitability and earnings are assumed to be crucial in influencing performance. • For the purpose of the study, it is assumed that performance is determined by the said financial ratios. • The researcher used pooling of interest method. Under this method the consolidated financial statements incorporate the combined results as if the banks had always been combined.

23 CHAPTER 4

4.0 DATA ANALYSIS AND INTERPRETATIONS

4.1: INTRODUCTION The study relies on Microsoft (MS) Excel statistical package for data analysis and a comparative analysis between the two periods carried out (Appendix II-Tables I -7). The charts in the study are similarly done using Ms Excel chart packages [Appendix III]. Performance ratios are computed for each year by institution to enable evaluation of the trend and determine w hether merger had an impact on performance enabling conclusions to be drawn.

Appendix IV shows Total assets, Total liabilities, shareholders funds, Total deposits, Total income and Net income before tax , while Appendix II indicate the ratios for the respective financial indicators. Trends analysis is presented by use ofcharts [Appendix

HI-]-

The trends indicate stable but lowr growing Gearing ratio way above the 8% minimum statutory requirement, high but fluctuating solvency ratio but low profitability ratios for most institutions during the period of the study.

• However, the overall trends in the financial ratios indicate improved performance during the post-merger period compared to pre-merger period.

4.2: TREND IN PERFORMANCE Trends in the financial performance ratios for the merged financial institutions used in this study are; profitability and earnings; capital adequacy and solvency ratios as indicated on the charts and tables in the appendices . Capital adequacy l atios ha\ e Ik i n stable but growing over the period of study w’ith average rates being well abo\e the. statutory requirement of 8%. I he rates however marginally dropped after merger period compared to pre-merger. T he minimum capital requirement has been re\ it wed constantly (Kshs.200 million in 1999 to Kshs.500 million by 2005). This has been a

24 major force behind the bank mergers.

Earnings have also been low due to high levels of non-performing debts which stood at Kshs.103.5 billion (37%) of Gross loans in 1999 (CBK MER Jan 20(X)).

4.2.1. SOLVENCY RATIOS :Summary of post merger results Solvency ratios have been moderately erratic over the period of the study. Table I [a] 4.2.1. (I) Total Liabilities/Total assets Category No. of Banks proport ion(%) Improved performance 8 40 Decline in performance 9 45 Effects not yet released 3 15 Total 20 100

Source: Research Data

Most institutions performed well above industry average during the period of the study. As measured by the solvency ratio it was noted that performance of 8 merged F inancial Institutions (representing 40%) improved, 9 (representing 45%) declined while 3 (representing 15%) were too new for the merger effects to he fully determined.

[i] Trans National Bank and Bank of India performed below industry average of 85.6% in 1994/1995. However, other Banks: Delphis (under statutory management), Commercial Bank of Africa, Stanbic Bank, First American Bank and Bank of Bai oda all performed above average.

25 Improved marginal performance after the merger was observed in the following Financial Institutions: National Bank of Kenya, Commercial Bank of Africa (CBA), National Industrial Credit, Bank of Baroda and Bank of India. Stanbic bank’s position remained fairly stable (Appendix II).

[ip Standard Chartered Bank, Barclays Bank of Kenya, Diamond Trust, Credit Agricole, Guardian Bank, Giro Commercial Bank and I labib AG Zurich indicate marginal drop in financial performance after merger.

Effects of merger have not been fully realised in the cases of Kenya Commercial Bank and Southern Credit Banking Corporation. Paramount Universal Bank’s results remained below industry average after merger following a marginal drop while Trust Bank shows improvement though now under liquidation after attempts to revive it became futile and was closed in 1998.

The results however indicate that most Banks operated above average and strive to meet future maturing obligations.

Bank of Baroda recorded a drastic drop from 116.92% in 1996 to 86.65% in 1997. Delphis Bank on the other hand though under statutory management also had a drastic increase from 89.62% in 1996 to 137.86% in 2001. I rust Bank (under liquidation) which had merged with Trust Bank Finance Ltd in 1997 had a resultant marked increase after merger period. It was observed that the decline t in performance for other Banks falling under this category was marginal, hence fairly stable.

26 Table I [b] 4.2.1 [ii] Shareholders Funds/Total Assets

Category No. of Banks Proportion (%) Improved Performance 14 70 Decline in performance 3 15 Effects not yet realised 3 15 Total 20 100

Source: Research Data As indicated in Table 1(b) 70% of the merged banks improved their performance as measured by the solvency ratio, 15% experienced a decline in performance while for the remaining 15% it is still too early to conclude on the direction of the change in financial performance.

Trans National Bank and NIC Bank recorded marked improvement after merger. The other Banks recorded marginal stable increase during the post-merger period compared to pre-merger period; Barclays Bank, Standard Chartered, Commercial Bank of Africa, Giro Bank, Bank of Baroda, Habib Ag Zurich and Diamond 1 rust. Although I rust Bank recorded an increase initially, it closed almost immediately after merger (1998) and is now under liquidation following unsuccessful attempts to revive it.

NBK Ltd and Delphis Bank recorded a decline in the ratios. KCB, Citibank NA and Southern Credit Banking Corporation merged in 2001 and effects of merger are yet to be realised. t

National Bank of Kenya’s performance declined then improved while that o f Bank of India dropped from 17.66% in 1995 to 12.23% in 2001 (Appendix II).

27 4.2.2 PROFITABILITY AND EARNINGS RATIOS: Summary of post merger results

These are fundamental financial ratios.

Table I [c] 4.2.2.(i) A s § e t Utilisation Total income / Total Assets Category No. of Banks Proportion (%) Improved performance 8 40 Decline in performance 9 45 Effects not determined 3 15 Total 20 100

Source: Research Data The asset utilization ratio indicates that 40% of the banks experienced an improvement in financial performance, 45% experienced a decline in financial performance while for the remaining 15% the merger results are not yet fully realized.

Most banks recorded a drop in profitability and asset quality. NBK, ('BA, NIC Bank, StanbicBank, First American Bank, Credit Agricole Indosuez, Diamond I rust Bank, Giro Commercial Bank, Bank of Baroda and Euro-Daima Bank recorded a drop after merger. Giro Bank dropped by 11.3% points since 1998 while Stanbic from 16.74% in 1997 to 11.5 % in 1998. Habib AG-Zurich, Bank of India, Paramount Universal hank recorded an improvement initially before dropping marginally. Delphis and I NB however recorded an initial drop before rising to 22.55% and 31.8% respectively in 2001 (Appendix II). Their positions on average were however better prior to merger period.

Though an improvement was noted after merger in the case of I rust Bank, it is cur rently under liquidation. Effects of merger have not been fully realised in the cases of KCB, Southern Credit Banking Corporation and Citibank NA (absorbed ABN Amro in t2()() 1).

Stanbic Bank and First American Bank recorded a fluctuation in performance. A recoi dec! 28 drop was observed but the position improved thereafter. Giro Commercial Bank performed better after merger. Table I [d] 4.2.2.(ii) R e t u r n cn E q u it y : Net income / Total Equity Capital

Category No. of Banks Proportion Improved performance 7 35 Decline in Performance 10 50 Effects not determined 3 15 Total 20 100

Source: Research Data. This ratio shows the management’s ability to utilise both creditors and owners funds to generate sales efficiently. Specifically, fable 1(d) indicates that 35% of the merged banks experienced improvement in performance as measured t by the return on equity, 50% experienced a decline while in the case of the other 15% it is too early to conclude on the merger results.

The results indicate that Stanbic, Giro Commercial Bank, Guardian Bank, Bank of Baroda, t Bank of India, Delphis Bank, Paramount Universal Bank, TNB improved after merger, though the positions for some banks reflects significant swings on either side; improved or decreased performance. Paramount Universal bank for instance recorded negative position prior to merger period. Trust Bank improved but is now under liquidation. BBK, STD, CBA, NIC, Stanbic, Habib AG-Zurich, Giro Bank and Guardian dropped on average during post Merger period. KCB and Southern Credit Banking Corporation are yet to realise the potential impact of merger. Mean return on equity was positive in 1999 unlike the previous year when the results were affected by NBK’s -693.8%.

National Bank improved from -163.96% in 1996, to-» 13.13% in 2001. Stanbic s performance improved but declined again to negative by 2001. Delphis recorded a negative performance of-1017.89% in 2000 but is now at *6.24%. Paramount Bank had 29 recorded a negative growth prior merger but improved thereafter. Trend for the case of BBK and STD are almost identical. Bank of Baroda improved Indore declining (Appedix II).

Table I [e] 4.2.2.(iii) Return cn Assets : Net Income / Total Assets

Category No. of Banks Proportion Improved performance 5 25 Decline in performance 12 60 Effects not yet realised 3 15 Total 20 10

Source: Research Data Measures Managements’ ability to utilise the company’s capacity efficiently to the benefit of the banks’ owners and creditors.The results indicate that 5 banks representing 25% recorded an improved position after merger, 12 banks representing 60% recorded a decline in performance while in the case of 3 banks representing 15%, it was too early to conclude on the impact of the merger.

STD and NBK on average improved their performance after merger. Stanbic s performance on the other hand improved then declined before improving again after merger. First American Bank, Diamond I rust, Guardian bank, Bank of Baroda, Bank of India recorded an improvement in financial performance on average after merger. Giro Bank though with a noted decline initially achieved stable performance.

Habib AG Zurich performed better prior to merger period. Other banks under this category include; CBA, NIC and BBK which performed better on average pi ior merge i period. The ratio declined in 1999 with average standing at 1% compared to 2 o the previous year indicating a decline in profitability. 30 NBK ltd improv ed from-13.82% in 1999 to-1.34% in 2001. CBA’s performance improved then declined. TNB Bank and Credit Agricole on the other hand saw a fluctuating position (Appendix II).

Table I [f]

4.2.3. CAPITAL ADEQUACY RATIOS

4.2.3[i] Shareholders Funds / Total Deposits

Category No. of Banks Proportion (%) Improved performance 15 75 Decline in performance 2 10 Effects not yet realised 3 15 Total 20 100

Source: Research Data Table 1(f) indicates that 75% of the merged banks experienced improvement in financial performance, 10% recorded a decline in financial performance while for the other 15% the time span since the merger is too short to draw conclusions on the impact ol the merger.

At least 75% of the Banks recorded improved performance after merger. All Banks with the exception of Trust Bank (under liquidation) and Delphis Bank (under statutory management) operated well above the minimum statutory requirement of 8%. Delphis Bank’s results fluctuated after merger period and stood at - 28.75% as at 2001. I rust Bank’s performance improved after merger but fell drastically after closure and unsuccessful attempts to revive it. The position as at 2001 was - 167.63% (Appendix II). The other Banks; KCB, Southern Credit Banking Corporation and Citibank NA are yet to realise the effects of merger.

31 CHAPTER 5

5.0 SUMMARY OF FINDINGS, CONCLUSIONS, LIMITATIONS AND RECOMMENDATIONS FOR FURTHER RESEARCH

5..1 SUMMARY OF FINDINGS AND CONCLUSIONS I he study was conducted with the aim of achieving the following objective: To evaluate financial performance of merged financial institutions using theoretical measures. Three Financial measures were used in this study; Capital Adequacy, Solvency, Profitability and earnings ratios to determine what implications merger restructuring method has on financial performance. The study established the financial performance of the merged Financial institutions in the pre-merger period and post-merger period [1994-2000]] as analysed in Chapter 4.

Annual financial performance ratios (Capital Adequacy,.Solvency and Profitability and Earnings ratio) were computed for the institutions in the pre and post merger periods. A comparative analysis of performance both in the pre merger as well as the post merger periods was undertaken to establish the implication on Bank financial performance.

Kenya’s Banking Sector is following in the Global business stream. Over the last 3 years small and medium sized Banking institutions have been forced into mergers and acquisitions essentially for survival. Smaller Banks have especially been prone to liquidity problems due to their weak capital base, imprudent lending policies and inefficient management. The Central Bank of Kenya has also urged Banks to merge in an effort to boost their capital base due to increased capital requirements and hence curb the spontaneous spate of Bank collapses.

Bigger and more stable multinationals have not been left behind in the merger spree. Merger restructuring approach has been used in streamlining operations; hence merge i with wholly owned subsidiaries as in the case of Barclays Bank (corpoi ate i esti uc tin ing) with Barclays Merchant Finance Ltd due to dwindling business coupled with ( entral Bank’s regulations to increase their capital to Kshs.l5()m in 1999 and gradually to 32 Kshs.375 Million by the year 2005.Fusion was then an easier option.

Daima bank’s intended merger with Euro Bank to inject capital hence strengthen capital base and reduce operating costs, ensure success and profitability has not materialised. Both Banks are locally owned and merger would have resulted in Kshs.2 billion in total assets and a capital base in excess of Kshs.250 million. Sizeable cost savings and improved profitability was also expected. Merger between Guardian Bank, Guilders bank and I* irst National Bank resulted in a capital base of Kshs.556 million and deposit portfolio of Kshs.3 billion. Merger was also an easier option of streamlining’operations as they have related shareholding.

Habib AG. Zurich and Habib Africa Bank Ltd were both locally owned. The merger of the two Banks which occurred in 1999 resulted in a capital base of Kshs.290 million.

Although the full effects of merger restructuring have not been fully realised in the case of Paramount and Universal banks, there has been a positive impact in that theii paid up capital rose to Kshs.25 million, Deposit base to Kshs. 1.2 billion and asset base to Kshs. 1.6 billion.

33 Table II

Minimum Core Requirements Compliance date Banks & Mortgage Financial Institutions Finance (Kshs. Million) Cos. (Kshs. Million) Dec. 1999 200 150 Dec. 2000 250 187.5 Dec. 2001 300 225.0 Dec. 2002 350 262.5 Dec. 2003 400 300 Dec. 2004* 450 337.5 Dec. 2005 500 375

Source: CBK Prudential Regulations for Banking Institutions (Sept.2000) Amendment of the banking Act required commercial banks and NBMS, Mortgage Finance Cos to raise their Capital base as above.

Standard Chartered Bank merged with Standard Chartered F inance services Ltd following failure to identify a feasible diversified business portfolio.

National bank of Kenya merged with its wholly owned subsidiary after it failed to generate adequate revenues to justify its existence.

Cititrust (K) Ltd merged with its owner Citibank NA. T he aim of this merger was to strengthen capital base; reduce operating costs, hence ensure success and profitability. Feasible cost savings and improved profitability is expected.

The analysis of Chapter four yields the following results for the pre-merger and post merger periods for the institutions studied.

34 Table II

PRE-MERGER AND POST MERGER PERIOD ANALYSIS

Ratios Improved Decline in Effects not yet performance performance realised Absolute %age Absolute %age Absolute %age figures figures figures Profitability/Earnin gs Ratios • Asset utilisation 8 40 9 45 3 15 • Return on equity 7 35 10 50 3 15 • Return on assets 5 25 12 60 3 15 Solvency Ratios • Total liabilities to 8 40 9 45 3 15 Total assets • Shareholders 14 70 3 15 3 15 funds to Total Assets Capital Adequacy 15 75 2 10 3 15 Ratio • Shareholders funds to Total Deposits Average 10 47.5 7 37.5 3 L i*__

Source: Research Data Table II shows that in the overall 47.5% of the merged banks experienced improved financial performance, 37.5% experienced deterioration in financial performance while 15% ot the mergers are too young to have realized any impact on performance.

Profitability and earnings have generally been low on average with fluctuations ranging

from drastic to moderate in both periods. Profitability and earnings was higher on average

in the pre merger period compared to post merger period. The positive effects o f merger

are likely to have been adversely affected by other factors.

Capital represents the shareholders investment in the institution. It is a resource that is

readily and freely available to participate in losses without obliging the institutions to cease

trading. It was observed that most of the Banks maintained the statutory requirement of 8%

over the period o f the study at times experiencing fast growth with averages ranging between 10 -16% . The observed results indicate an improved position after merger period.

Whereas the improved performance could be as a result of merger restructuring, the changes in the CBK regulations to increase the minimum capital requirements could have substantially impacted on this ratio.

Solvency was also observed to have improved marginally in post merger period compared with pre merger period. This is possibly as a result of effects of the law on Solvency ratio.

« The overall financial performance on average indicate an improvement after merger period compared to pre-merger period. It can therefore be concluded that although financial performance of some Banks improved while that of others deteriorated, merger restructuring could still he a considered and recommended option to improve hank performance. This is more so in the case of small medium sized hanks, weak or ailing financial institutions with a narrow business. Merger restructuring is likely to positively affect financial performance due to renewed attention to business, improved management and Accounting, legal regulatory systems, better credit assessment and approval techniques and reduced staffing levels. The merged institution is likely to realise higher rates of return.

36 5.2. LIMITATIONS OF THE STUDY This study was carried out using data derived f rom Financial statements of both Banks and Non -Bank financial Institutions (NBMS) and so one has to be cautious of the limitations associated with such data. The data may be subject to manipulation by the management of the institutions.

Prior to 1998, Financial Institutions reporting dates were different until June 1998 when Financial Year was synchronised to run concurrent with the calendar year. Requirement to publish standard format of Financial Statements presentation and more disclosures also made it easier to analyse data after this date. This was not possible prior 1998 as information on Financial Statements was scanty; hence inadequate as regards performance of individual Banks. Even Central Bank Supervisory reports do not still disclose this information.

t The size (population) of study was limited (20 institutions). The period of focus was also limited (3 pre and Spost merger period). More reliable results could be obtained if the population was larger and the period more; say 5 years as recommended by Lev and Mandelker (1972) and Kelly (1967). Merger restructuring approach started in 1994 in the Banking Sector. Some of the data was unavailable. This obviously influences the results of the study. Other factors that may have influenced performance, other than merger restructuring could not be isolated. It was therefore difficult to outrightly conclude that merger per se had an impact on performance as other factors are likely to have contributed to the trend or recorded results. Interpreting the results was therefore a challenging task.

As with any other research, the study was undertaken within a fixed duration and the researcher did not have adequate time to explore aspects like effects of peer group or other overriding factors on performance.

Another limitation encountered was that the institutions merged on different dates. It was therefore difficult to have a clear overall picture of the pre-merger and post-merger per iods to enable comparison and draw conclusions. The institutions had to be analysed individually.

5.3. SUGGESTIONS FOR FURTHER RESEARCH ’ The Banking sector is an important engine in the economic growth of the country. The sector, both in size and sector covers 11% of the whole economy (CBK, MER, Various). Monetary policy is largely implemented through the Banking sector, hence its stability cannot be overemphasized.

Other than licensing procedures and rules which are important in improving and sustaining resilience in the sector, restructuring through merger approach to strengthen these institutions further is necessary. Central Bank of Kenya is addressing these issues with various Amendments to the Banking Act and building inspection capacity: Bank supervision Unit (CBK Annual reports; various). These efforts are laudable and sustaining the same is recommended so as to forestall Bank failures in the economy which has adversely affected the sector and the economy at large as experienced in the recent past.

Another possible area of study is a research on other factors that affect Bank performance; such as quality of management. A study on Characteristics of Banks that merged in relation to studies and practical cases in other countries is also recommended.

A study on effectiveness of other restructuring approaches; Financial or operational approaches and/or structural and Financial measures can also be undertaken.

The data derived was analysed for pre-merger, combined results of the independent fir ms and post-merger. Inferences were then made on the basis of the information.

5.4 RECOMMENDATIONS TO POLICY MAKERS

The banking sector plays a central role in our economy. It is therefore important tor the

Central Bank of Kenya as the banking sector supervisor, advisor and regulator and for other monetary authorities and the Treasury to critically assess the overall performance o f this sector and endeavour to design policies, strategies and tools of reform to strengthen and improve its performance.

Restructuring approach has been used in other countries to resolve banking crisis and improve financial performance in the banking sector. There is however need to identify the characteristics o f banks that are likely to improve in their financial performance using merger approach. The country’s situation should also be analysed .

It was observed from this study that most merged banks recorded improvement in terms ot financial performance indicators with minimum statutory requirements, but recorded a decline in performance in other ratios. This not withstanding, merger restructuring can still be a considered option particularly in the case ol small medium sized banks. GLOSSARY

The following are descriptions of some terms used in this study: 1. Bank Restructuring according to De Juan refers to “the treatment of deeply insolvent banks or banking systems through rehabilitation or liquidation.”

2. Financial Crises/Banking crises: Mitchell (1913) defines financial crises as the process of intensive liquidation of credit. For Friedman and Schwartz (19(>3) it is a situation where banks are forced to sell assets at a loss to replenish reserves.

3. Banking System: For purposes of the study, this term will be referring to commercial banks and Non-Bank Financial Institutions licenced and operating banking business in Kenya.

According to the Banking Act Chapter 48k (i) A “Bank" means “a company which carries on or proposes to carry on banking business in Kenya and includes the Co-operative Bank of Kenya Ltd but does not include the Central Bank."

(ii) A “Financial Institution “or" Non-Bank Financial Institution means a company other than a bank which carries on or proposes to carry on financial business and includes any other company which the minister may by notice in the gazette, declare to be a financial institution for purposes of this act.”

(iii) “An institution" means “a bank or financial institution or a mortgage finance company.’' (iv) “Financial business" means; (a) “The accepting from members of the public of money on deposit repayable on demand at the expiry of a fixed period after notice, and

(b) the employing of money held on deposit or any part of the money by 40 lending, investment or in any other manner for the account and the risk of the person so employing the money”.

5. Bank Failure: According to De Juan: "A failed bank is one which is insolvent, they are largely identified by bank examiners or when their creditors take action against them”.

6. Bank Soundness: Lindgren defines a sound banking system as one in which most banks are solvent and likely to remain so. Solvency (net worth) is reflected in a bank’s balance sheet: Assets, Liabilities and Capital (equity). The likelihood of remaining solvent depends on the bank’s ability to be efficient and profitable. For bank restructuring to achieve and sustain solvency, the banks must be well managed and be sufficiently capitalized and hence, be profitable. The structure of the financial system is unique. It however, holds a central place in the economy hence the need for the system to be sound. Problems of one bank spread quickly to another threatening the stability of the entire system. A sound banking and financial system, therefore, is a sine qua non for effective mobilization and efficient allocation of resources (Jayamaha 1998).

7. Performance: It is taken as the predictive value of financial institutions performance. It is obtained by a factor of 4 ratios which give an indication of financial institutions’ strength.

Z(%) = Gearing ratio (%) Capital/’total deposits Liquidity ratio Liquid assets/Net liabilities Asset quality Ratio Total loans/Total assets Earnings Ratio Earnings/Total assets

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• 20. Long, M.; (1990) Financial Systems & Development. Economic Development Institute of the World Bank. FDI Working Papers 21. Mugo, M. J, (2000) “Predictability of Financial Crisis in K enyaMBA Research Project. 22. Pandy, I. M; (1999) Financial Management 8th Edition. Vikas Publishing House PV I Ltd. 23. Ross A. et. al: (19991 Corporate Finance. 4lh Edition. Irwin McGraw Hill Cos. Inc. 24. Saunders A.: f2002^ Financial Institutions Management. A modem Perspective. 3rd Edition. 25. Schall D. & Haley W.: (1997) Introduction to Financial Management: 6th Edition. Me Graw Hill Inc 26. Senbet W. L.: (1998) “Global Financial Crisis: Implications for Africa”. University of Maryland. The Robert H. Smith School of Business. College Park 27. Sheng A., (1991) “The Art of Bank Restructuring, “Economic Development Institute, Working Paper, World Bank, Washington DC. 28. Smith W. C. Jr. (1990) The Theory of Modem Corporate Finance; 2nd Edition. MaGraw Hill Inc. 29. The Banking Act, Chapter 488. Laws of Kenya 30. The Central Bank of Kenya Act, Chapter 491, Laws of Kenya 31. Thygerson J. K.: (1995) Management of Financial Institutions. Harper Collins College Publishers 32. Vanhorne C. J.: (1997) Financial Management and Polic£_10

43 Appendix I MERGERS OF INSTITUTIONS SINCE 1994 Approved Mergers/Takeovers

NO. INSTITUTION MERGED CURRENT/P DATE WITH ROPOSED APPROVE NAME D 1. Indosuez Merchant Banque Credit Agricole 10.11.94 Finance Indosuez Indosuez 2. Transnational Finance Transnational Transnational 28.11.94 Ltd. Bank Bank Ltd. 3. Ken Baroda Finance Ltd. Bank of Baroda Bank of Baroda 02.12.94 (K) Ltd. (K) Ltd. 4. First American Finance First American First American 05.09.95 Ltd. Bank Ltd. Bank (K) Ltd. 5. Bank of India Bank of India Bank of India 15.11.95 Finance (Africa) Ltd. 6. Stanbic Bank (K) Ltd. Stanbic Finance Stanbic Bank 05.01.96 (K) Ltd. Kenya Ltd. 7. Mercantile Finance Ltd. Ambank Ltd. Ambank Ltd. 15.0196 8. Delphis Finance Ltd. Delphis Bank Delphis Bank 17.01.96 Ltd. Ltd. 9. CBA Financial Services Commercial Commercial 26.01.96 Bank of Africa Bank of Africa Ltd. Ltd. 10. Trust Finance Ltd. Trust Bank (K) Trust Bank (K) 07.01.97 Ltd. Ltd. 11. National Industrial African NIC Bank 14.06.97 Credit Bank Ltd. Mercantile Ban. Corp. 12. Giro Bank Ltd. Commercial Giro 24.11.98 Bank Ltd. Commercial Bank 13. Guardian Bank Ltd. First National Guardian Bank 24.11.98 Finance Bank Ltd. Ltd.

44 14. Diamond Trust Bank (K) Premier savings Diamond Trust 12.02.99 Ltd. & Finance Ltd. Bank (K) Ltd. 15. National Bank of Kenya Kenya National National Bank 24.05/99 Ltd. Capital Corp. of Kenya Ltd. 16. Standard Chartered Standard Standard 17.11.99 Bank (K) Ltd. Chartered Chartered Bank Financial (K) Ltd. Services 17. Barclays Bank of Kenya Barclays Barclays Bank 22.11.99 Ltd. Merchant of Kenya Ltd. Finance Ltd. 18. Habib A. G. Zurich Habib Africa Habib Bank A. 30.11.99 Bank Ltd. G. Zurich 19. Guilders Inter. Bank Guardian Bank Guardian Bank 03.12.99 Ltd. Ltd. Ltd. 20. Universal Bank Ltd. Paramount Bank Paramount 11.01.2000 Ltd. Universal Bank 21 Fidelity Commercial Southern Credit Southern 11.01.2000 Bank * Bank Ltd. Fidelity Bank Ltd. 22 Euro Bank Ltd.* Daima Bank Euro Daima 11.01.2000 Ltd. Bank Ltd. 23. Kenya Commercial Bank Kenya KCB 21.03.2001 Commercial Finance Co. 24. Southern Credit Bank Southern Credit Southern Credit 17.12.2001 Ltd. Bank Ltd. Bank Ltd. 25. Citibank NA ABN Amro Citibank NA 16.10.2001 Bank Ltd. • * Mergers that did not take off

45 APPENDIX IV TOTAL ASSETS INSTITUTION (Ksh millions) 2,001 2,000 1,999 1,998 1,997 1,996 1,995 1994 1993 1992 1991 Commercial Bank of Africa Ltd 16,251 12,783 11,872 12,081 9,288 7,877 5,618 4269 4269 3915 2860 Bank of Baroda (K) Ltd 3,827 3,309 3,083 2,928 2,239 2,687 2,685 3062 2773 Bank of India 3,823 3,239 3,265 3,593 3,340 3,051 2,148 Barclays Bank of Kenya Ltd. 73,647 70,377 69.292 70,362 60,563 52,693 46,235 42834 39322 25793 21144 Citibank-NA 27,710 38,033 25,941 23,506 18,622 17,493 Credit Agricole Indosuez 5,794 5,732 4,621 4,176 3,759 3,452 Delphis Bank 1,796 3,646 4,387 4,264 4,967 3,536 3,123 2422 1558 Diamond Trust{K]Ltd ** 5,530 5,170 5,996 6,436 7,248 8,983 8,194 7318 5460 Euro/Daima Bank 2,185 2,263 1,735 1,750 1,604 1,319 1,367 First American Bank of Kenya Ltd 6,389 5,627 5,771 5,509 5,247 4,431 4,005 3401 2262 Giro Commercial Bank 4,119 4,068 3,745 3,880 4,295 1,625 1,170 3338 3928 Guardian Bank Ltd 3,625 4,233 4,419 3,158 3,834 4,035 2,262 2866 Habib AG Zurich 3,514 3,094 3,118 3,164 2,693 2,462 Kenya Commercial Bank 65,206 73,328 75,260 79,032 73,122 68,239 57,931 60608 38512 25867 22489 National Bank of Kenya 24,043 23,940 25,114 27,396 29,027 24.447 18,257 17566 12825 10691 National Industrial Credit Bank Ltd 8,408 7,442 7,212 7,343 8,033 8,904 7,307 4916 3235 2689 ParamountUniversal Bank Ltd 1,358 1,462 1,468 1,541 1,623 1,048 477 Southern Credit Banking Corp Ltd 2,894 1,562 2,655 1,560 3,574 3,093 2,629 Stanbic Bank Kenya 6,624 7,129 6,930 6,606 6,510 4,070 4,321 3537 Standard Chartered {K} Ltd 54,480 49,188 42,772 37,942 32,708 30,771 27,173 25820 23359 18537 15815 Trans National bank Ltd 1,588 1,369 1,374 2,013 2,020 2,175 1,507 1797 2067 Trust Bank (K) Ltd 4,199 7,330 closed 17,124 14,306 11,296 TOTAL * 322,811 331,193 317,360 308,240 301,440 270,697 207,705 180,416 135.642 90,830 66,236

Page 46 TOTAL LIABILITIES INSTITUTION Ksh millions 2001 2000 1999 1998 1997 1996 1,995 1994 1993 1992 1991 Bank of Baroda 3,444 2,945 2,747 2,621 1,940 2,371 2,419 Bank of India 2,748 2,726 2,710 3.048 2.730 1,944 1,691 Barclays Bank of Kenya 62,247 60,034 60,554 62,193 53,693 46,967 41,697 39345 38861 Citibank NA 23,696 19,948 21,995 19,960 16,081 14,685 Commercial Bank of Africa 14,355 11,120 10,383 10,700 8,098 6.887 4,908 Credit Agricole Indosuez 5,071 5,087 4,019 3,790 3,474 3,202 Delphis Bank Ltd 2,477 3,560 3,796 3,799 4,517 3,169 2,766 2183 1367 Diamond Trust (k) Ltd 4,280 3,946 4,858 5,487 6,444 7,779 7,183 6430 4643 Euro/Daima Bank 2,116 2,066 1,561 1,492 1,367 1,115 1,186 983 First American Bank Ltd 5,244 4,589 4,788 4,655 4,537 3,892 3,576 3056 2025 1668 Giro Commercial Bank Ltd 3,744 3,711 3,402 3,546 3,960 2,889 1,084 662 Guardian Bank Ltd 2,990 3,627 3,838 1,987 1,684 1,732 Habib AG Zurich 3,161 2,806 2,838 2,859 2,462 2,059 Kenya Commercial Bank 56,826 65,280 66,419 68,677 63,316 60,099 51,507 56052 35315 23683 20604 National Bank of Kenya 21,586 21,804 22,997 22,828 25,699 21,256 15,264 14643 11539 9958 National Industrial Credit Bank 5,999 5,146 5,170 5,456 6,293 7,219 6,303 3885 2815 Paramount/Universal Bank 1,090 1,202 1,435 1,432 1,422 918 414 Southern Credit Banking Corp Ltd 1,786 1,147 2,532 1,387 3,203 2,753 2,419 Stanbic (K) Bank Ltd 5,881 6,177 5,944 5,631 5,616 3,496 3,784 3116 Standard Bank of Kenya 48,680 43.003 38,250 33,938 29,483 27,993 25,046 23998 21612 17116 14691 Trans National bank Ltd 898 930 959 1,170 * 1.191 1,538 * 1,121 1231 1618 Trust Bank (K) Ltd(under statutory management) 5,359 7,757 - 16,163 13.408 10.549 (iTOTAL 1 278,319 276,213 278,952 266,656 263,373 237,371 182,917 155584 119795 52425 35295

Page 47 SHAREHOLDERS FUNDS INSTITUTION (Ksh Millions 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 Bank of Baroda (K) Ltd 383 364 336 307 299 293 265 Bank of India 383 319 401 392 475 417 802 Barclays Bank of Kenya Ltd 11,400 10,343 8.738 8,169 6,870 5,726 4,538 3489 2217 1991 Citibank NA 4,015 2,295 3,887 3,546 2,541 2,628 Commercial Bank of Africa 1,896 1,662 1,489 1,383 1,186 990 710 Credit Agricole Indosuez 723 645 605 386 285 250 - Delphis Bank 680 86 591 465 450 367 358 222 164 Diamond Trust (K) Ltd 1,250 1,224 1,138 949 804 1,204 1,010 889 817 Euro/Daima Bank 69 197 174 258 237 205 182 First American Bank (K) Ltd 1,145 1,038 983 854 710 539 396 Giro Commercial Bank 375 357 345 334 335 205 87 77 Guardian Bank Ltd 635 606 581 314 204 585 Habib AG Zurich 354 288 275 294 242 215 95 Kenya Commercial Bank Ltd 8,380 8,048 8,841 10,356 9,806 8,140 6,424 4556 3197 National Bank of Kenya 2,457 2,136 2,117 4,568 3,328 3,119 2,993 2923 National Industrial Credit Bank Ltd 2,409 2,296 2,042 1,847 1,707 1,287 1,004 531 421 226 162 Paramount/Universal 268 260 279 166 210 130 63 Southern Credit Banking Corp Ltd 1,108 415 421 173 372 340 210 Stanbic Bank (K) Ltd 742 952 986 975 894 574 537 Standard Bank (K) Ltd 5,800 6,185 4,522 4,004 3,225 2,778 2,127 1821 1747 Trans National Bank Ltd 690 439 416 568 550 641 • 677 - Trust bank (K) Ltdfunder liquidation) 1,160 427 closed 715 754 747 TOTAL 45,162 41,315 39,594 40,308 35,445 31,387 23,225 14,508 8,563 226 2,153

Page 48 TOTAL NET OPERATING INCOME

(Ksh Millions) INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 ABN-AMRO Bank 1,284 1,347 1,321 990 Bank of India 269 250 285 295 238 Bank of Baroda 305 284 300 303 243 Barclays Bank of Kenya Ltd 11,262 11,324 10,653 9,948 9,057

Bullion Bank - - Commercial Bank of Africa Ltd 1,303 1.306 1,210 1,255 1,343 Citibank-NA 1,733 2,778 2,578 2,406 1,743 Credit Agricole Indosuez 421 496 461 443 401

Delphis Bank (under statutory management) 184 495 780 1,619 1,221 860 995 661 504 20 Diamond Trust Bank***** 371 880 946 988 1767* 229 402 395 Euro/Daima Bank 181 284 257 515 374 First American Bank Ltd 578 547 539 592 559 Giro Commercial Bank 257 256 260 273 244 Guardian Bank *** 254 275 290 125 96 Habib AG Zurich 274 261 364 473 259 Kenya Commercial Bank Ltd 8,790 9,370 8,766 8,664 9,228 National Bank of Kenya Ltd 2,439 1,757 2,341 1,297 2,913 National Industrial Credit 854 941 1,418 1,912 944 Paramount Bank 92 68 200 487 191 102 55 • Southern Credit Bank 164 175 437 438 81 Stanbic Bank Ltd. 362 373 884 1,201 402 Standard Chartered Bank Ltd 6,486 6,153 6,927 7,915 5,033 TransNational Bank 313 132 129 173 238 Trust Bank(under liquidation) 534 739 - - Universal Bank 125 236 TOTAL 36,892 40,253 42,236 42,879 35,798 1,191 1,452 1,056 504 NET INCOME (BEFORE TAX) INSTITUTION ______(Ksh Millions) 2,001 2,000 1,999 1,998 1,997 1,996 1,995 1994 1993 1992 1991 Bank Baroda (K) Ltd 52 47 44 54 55 467 Bank of India 116 123 151 105 107 120 Barclays bank of Kenya Ltd 4,235 3,035 3,361 4,242 3,974 3,625 3,192 3398 2246 1109 812 Citibank NA 699 1,107 995 1,092 761 904 Commercial bank of Africa Ltd 516 392 392 561 593 473 363 468 290 217 Credit Agricole Indosuez 63 68 155 101 35 (77) Delphis bank (K) Ltd (519) (747) 36 27 51 29 46 51 71 Diamond trust (K) Ltd 51 200 155 208 210 (73) 401 399 297 175 Euro/Daima bank 116 48 (85) 46 58 43 46 50 First American bank (K) ltd 227 121 207 204 352 285 253 251 153 74 Giro commercial bank (K) Ltd 30 20 17 32 58 38 152.1 Guardian bank Kenya Ltd 56 56 42 26 42 42 53 131 Habib AG Zurich 113 106 86 119 104 128 Kenya commercial bank 369 766 2,239 1,408 4,116 4,046 3,780 2839 2041 National bank of Kenya Ltd 323 (1,620) (3,471) (3,058) 650 904 633 429 150 196 National industrial credit bank Ltd 377 451 461 436 590 579 546 340 287 132 84 Paramount 12 17 21 22 6 3 4 Southern credit banking corpLtd 8 (14) 8 6 9 33 41 51 29 7 Stanbic Kenya Ltd (294) (443) 34 (386) 112 64 86 82 Standard chartered bank (K) Ltd 3,224 3,172 2,566 2,291 1,790 1,763 1,762 1363 644 838 546 Trans national bank Ltd 221 22 (152) 11 35 22 TOTAL 9,995 6,927 7,262 7,547 13,708 13,415 11,205 9,856 6,208 2.748 1,594

Page 50 TOTAL DEPOSITS {Ksh Millions} INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Bank of Baroda (K) Ltd 3,324 2,833 2,635 2,476 1,834 2,180 2,592 2452 Bank of India 2,602 2,594 2,540 3,178 1,862 2,507 1,581 Barclays Bank (K) Ltd 56,788 53,132 53,882 51,262 45,177 38,758 36,012 33055 35589 23367 19623 Citibank NA 20,805 19,769 17,730 17,025 14,794 13,052 Commercial Bank of Africa 13,444 10,200 9,951 10,289 7,475 6,448 4,649 3321 3108 2333 Credit Aqricole indosuez 3,812 4,675 3,611 3,578 2,995 2,890 Delphis bank Ltd 2,235 3,489 3,633 3,650 4,338 2,992 2,623 2046 1313 Diamond trust (K) Ltd 3,889 3,672 4,527 5,137 5,988 7,327 6,738 5655 3994 *2985 2513 Euro/Daima Bank 1,540 1,972 1,424 1,406 1,272 1,021 1,140 638 450 First American Bank (K) Ltd 4,771 4,509 4,660 4,486 4,283 3,678 3,389 2834 1795 1552 Giro Commercial Bnk Ltd 3,596 3,589 3,285 3,227 3,602 2,460 1,018 592 Guardian Bank Ltd 2,888 3,306 3,281 1,776 1,625 1,586 Habib AG Zurich 2,957 2,601 2,562 2,015 2,234 1,842 1,423 Kenya Commercial Bank 46,842 48,874 55,546 54,405 56,493 54,537 46,037 National Bank of Kenya 17,402 19,560 21,440 30,448 22,923 18,384 17,566 12687 10671 9266 National Industrial Credit Bank Ltd 5,571 4,703 4,681 5,095 5,897 5,850 Paramount 1,032 1.151 1,153 1,241 1,294 882 404 Southern Credit Bankinq Corp Ltd 1,626 876 2,308 1,352 3,056 2,605 2,317 Stanbic Bank (K) Ltd 5,526 5,836 5,777 5,220 5,851 6,767 5,704 3075 Standard Chartered Bank (K) Ltd 45,059 39,311 34,939 30,821 26,262 24,656 21,536 Trans National Bank Ltd 693 810 861 1,085 1,008 1,321 985 1099 1419 Trust Bankfunder liquidation) 692 1,094 closed 15,787 12,629 9,964 . - - - [TOTAL 246,402 238,154' 241,520 239,172 236,050 214,372 165,678 67.454 58.339 36,518 22,130 |

Page 51 INSTITUTION TOTAL INCOME Ksh Millions 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Bank of Baroda (K) Ltd 464 436 457 530 588 Bank of India 416 389 435 599 519 Barclays Bank (k) Ltd 12716 13028 12499 14061 12159 Citibank NA (K) Ltd 2467 4193 3704 4082 3811 Commercial Bank of Africa Ltd 1900 1837 2060 2341 2055 Credit Agricole Indosuez 667 793 652 801 735 Delphis Bank (under statutory management) 396 508 784 1259 971 Diamond Trust Bank Ltd 620 892 973 1617 1623 Euro/Daima Bank 399 452 387 534 477 First American Bank (K) Ltd 871 912 899 1270 1196 Giro Commercial Bank Ltd 583 615 638 988 942 Guardian Bank (K) Ltd 478 597 658 437 445 Habib AG Zurich 428 419 364 473 405 Kenya Commercial bank Ltd 11695 12973 14384 17903 17032 National Bank (K) Ltd 3431 3165 4111 6031 6072 National Industrial Credit Bank Ltd 1133 1278 1418 1910 2175 Paramount/Universal Bank 196 167 142 164 112 Southern Credit Banking Corp Ltd * 309 335 441 435 366 * - Stanbic Bank (K) Ltd 738 807 884 1201 1051 Standard Bank (K) Ltd 7869 7462 6927 7915 7078 Trans National Bank (K) Ltd 505 333 396 466 508 Trust Bank (under liquidation) - 842.00 847.00 closed -

Page 52 NOTE: ** Mergers that did not take off H Date of Merger APPENDIX II - SOLVENCY RATIOS

Table 1 (a)Total Liabilities/Total Assets

INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Commercial Bank Of Africa Ltd 88.33% 86.99% 87.46% 88.57% 87.19% 87.43% 87.36% 0.00% 0.00% 0.00% 0.00% Bank Of Baroda (K) Ltd 89.99% 89.00% 89.10% 89.52% 86.65% 88.24% 90.09% 0.00% 0.00% - - Bank Of India 71.88% 84.16% 83.00% 84.83% 81.74% 63.72% 78.72% - - . - Barclays Bank Of Kenya 84.52% 85.30% 87.39% 88.39% 88.66% 89.13% 90.18% 91.85% 98.83% 0.00% 0.00% Citibank-NA 85.51% 52.45% 84.79% 84.91% 86.35% 83.95% - - - - - Credit Agricole Indosuez 87.52% 88.75% 86.97% 90.76% 92.42% 92.76% - - - - - Delphis 137.92% 97.64% 86.53% 89.09% 90.94% 89.62% 88.57% 90.13% 87.74% . - Diamond Trust(K)Ltd 77.40% 76.32% 81.02% 85.25% 88.91% 86.60% 87.66% 87.87% 85.04% . • Euro/Daima Bank 96.84% 91.29% 89.97% 85.26% 85.22% 84.53% 86.76% - _ - • First American Bank 82.08% 81.55% 82.97% 84.50% 86.47% 87.84% 89.29% 89.86% 89.52% - . Giro Commercial Bank 90.90% 91.22% 90.84% 91.39% 92.20% 177.78% 92.65% - - 0.00% 0.00% Guardian Bank Ltd 82.48% 85.68% 86.85% 62.92% 43.92% 42.92% 0.00% 0.00% _ - • Habib Ag Zurich 89.95% 90.69% 91.02% 90.36% 91.42% 83.63% - - - - - Kenya Commercial Bank 87.15% 89.02% 88.25% 86.90% 86.59% 88.07% 88.91% 92.48% 91.70% 91.56% 91.62% National Bank Of Kenya 89.78% 91.08% 91.57% 83.33% 88.53% 86.95% 83.61% 83.36% 89.97% 93.14% - National Industrial Credit Bank Ltd 71.35% 69.15% 71.69% 74.30% 78.34% 81.08% 86.26% 79.03% 87.02% 0.00% - Paramount/Universal Bank Ltd 80.27% 82.22% 97.75% 92.93% 87.62% 87.60% 86.79% - - • - Southern Credit Banking Corp Ltd 61.71% 73.43% 95.37% 88.91% 89.62% 89.01% 92.01% - - - • Stanbic Bank Kenya 88.78% 86.65% 85.77% 85.24% 86.27% 85.90% 87.57% 88.10% - - - Standard Chartered {K} Ltd 89.35% 87.43% 89.43% 89.45% 90.14% 90.97% 92.17% 92.94% 92.52% 92.33% 92 89% Trans National Bank Ltd ' 56.55% 67.93%- ■69.80% 58.12% . 58.96% 70.71% - 74.39% 68.50% 78.28% - Trust Bank (K) Ltd - 127.63% 105.83% - 94.39% 93.72% 93.39% - - - - Industry Average 85% 85.25% 87.43% 84.52% 84.66% 87.83% 82.97% 66.47% 72.78% 39.58% 36.90%

Page 53 Table 2 (b)Shareholder Funds/Total Assets

INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Commercial Bank Of Africa Ltd 11.67% 13.00% 12.54% 11.45% 12.77% 12.57% 12.64% 0.00% 0.00% 0.00% 0.00% Bank Of Baroda (K) Ltd 10.01% 11.00% 10.90% 10.48% 13.35% 10.90% 9.87% 0.00% 0.00% - - Bank Of India 10.02% 9.85% 12.28% 10.91% 14.22% 13.67% 37.34% - - - - Barclays Bank Of Kenya 15.48% 14.70% 12.61% 11.61% 11.34% 10.87% 9.82% 8.15% 5.64% 0.00% 9.42% Citibank-NA 14.49% 6.03% 14.98% 15.09% 13.65% 15.02% - - - - - Credit Agricole Indosuez 12.48% 11.25% 13.09% 9.24% 7.58% 7.24% - - - - - Delphis 37.86% 2.36% 13.47% 10.91% 9.06% 10.38% 11.46% 9.17% 10.53% - - Diamond Trust(K)Ltd 22.60% 23.68% 18.98% 14.75% 11.09% 13.40% 12.33% 12.15% 14.96% - - Euro/Daima Bank 3.16% 8.71% 10.03% 14.74% 14.78% 15.54% 13.31% - - - - First American Bank 17.92% 18.45% 17.03% 15.50% 13.53% 12.16% 9.89% 0.00% 0.00% - - Giro Commercial Bank 9.10% 8.78% 9.21% 8.61% 7.80% 12.62% 7.44% - - 0.00% 0.00% Guardian Bank Ltd 17.52% 14.32% 13.15% 9.94% 5.32% 14.50% 0.00% 0.00% - - - Habib Ag Zurich 10.07% 9.31% 8.82% 9.29% 8.99% 8.73% - - - - - Kenya Commercial Bank 12.85% 10.98% 11.75% 13.10% 13.41% 11.93% 11.09% 7.52% 8.30% 0.00% 0.00% National Bank Of Kenya 10.22% 8.92% 8.43% 16.67% 11.47% 12.76% 16.39% 16.64% 0.00% 0.00% - National Industrial Credit Bank Ltd 28.65% 30.85% 28.31% 25.15% 21.25% 14.45% 13.74% 10.80% 13.01% 8.40% - Paramount/Universal Bank Ltd 19.73% 17.78% 19.01% 10.77% 12.94% 12.40% 13.21% - - - - Southern Credit Banking Corp Ltd 38.29% 26.57% 15.86% 11.09% 10.41% 10.99% 7.99% - - - - Stanbic Bank Kenya 11.20% 13.35% 14.23% 14.76% 13.73% 14.10% 12.43% 0.00% - - - Standard Chartered {K} Ltd 10.65% 12.57% 10.57% 10.55% 9.86% 9.03% 7.83% 7.05% 7.48% 0.00% 0.00% Trans National Bank Ltd 43.45% 32.07% 30.28% 28.22% 27.23% 29.47% 44.92% 0.00% 0.00% - - Trust Bank (K) Ltd - 27.63% 5.83% - 4.18% 5.27% 6.61% - - - - Industry Average 17.50% 14.50% 14.55% 13.47% 12.56% 12.99% 13.98% 5.50% 5.45% 1.20% 1.88%

Page 54 PROFITABILITY & EARNINGS RATIO

Table 3 (a) Return on Equity: Net Income/Total Equity Capital%

INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991

Commercial Bank Of Africa Ltd 27.22% 23.59% 26.33% 40.56% 50.00% 47.78% 51.13% - - - -

Bank Of Baroda (K) Ltd 13.58% 12.91% 13.10% 17.59% 18.39% 159.39% 0.00% - - - -

Bank Of India 30.29% 38.56% 37.66% 26.79% 22.53% 28.78% 0.00% - - - - Barclays Bank Of Kenya 37.15% 29.34% 38.46% 51.93% 57.85% 63.31% 70.34% 97.39% 101.31% - 40.78% Citibank-NA 17.41% 48.24% 25.60% 30.80% 29.95% 34.40% - - - - . Credit Agricole Indosuez 8.71% 10.54% 25.62% 26.17% 12.28% -30.80% - - - - - Delphis -76.32% -868.60% 6.09% 5.81% 11.33% 7.90% 12.85% 22.97% 43.29% - - Diamond Trust(K)Ltd 4.08% 16.34% 13.62% 21.92% 26.12% -6.06% 39.70% 44.88% 36.35% - -

Euro/Daima Bank 168.12% 24.37% -48.85% 17.83% 24.47% 20.98% 25.27% - • - - First American Bank 19.83% 11.66% 21.06% 23.89% 49.58% 52.88% 63.89% - - - - Giro Commercial Bank 8.00% 5.60% 4.93% 9.58% 17.31% 18.54% 0.00% 0.00% - - -

Guardian Bank Ltd 8.82% 9.24% 7.23% 8.28% 20.59% 7.18% - - - - -

Habib Ag Zurich 31.92% 36.81% 31.27% 40.48% 42.98% 59.53% 0.00% - - - - Kenya Commercial Bank 4.40% 9.52% 25.33% 13.60% 41.97% 49.71% 58.84% 62.31% 63.84% - - National Bank Of Kenya 13.15% -75.84% -163.96% -66.94% 19.53% 28.98% 21.15% 14.68% - - - National Industrial Credit Bank Ltd 15.65% 19.64% 22.58% 23.61% 34.56% 44.99% 54.38% 64.03% 68.17% 58.41% 51.85% Paramount/Universal Bank Ltd 4.48% 6.54% 7.53% 13.25% 2.86% 0.00% 4.76% - - - - Southern Credit Banking Corp Ltd 0.72% -3.37% 1.90% 3.47% 2.42% 9.71% 19.52% - - - - ‘ Stanbic Bank Kenya -39.6Z% -46.53% 3.45% -39.59% 12.53% 11.15% 16.01%* - - - - Standard Chartered {K} Ltd 55.59% 51.29% 56.74% 57.22% 55.50% 63.46% 82.84% 74.85% 36.86% - - Trans National Bank Ltd 32.03% 5.01% -36.54% 1.94% 6.36% 3.43% 0.00% - - - - Trust Bank (K) Ltd Industry Average 18.34% -30.25% 5.67% 15.63% 26.62% 32.15% 28.93% 47.64% 58.30% 5841% 46 32%

Page 55 Table 4 (b)Return on Assets :Net Income (before Tax)fTotal Assets

INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Commercial Bank Of Africa Ltd 8.02% 10.22% 10.19% 10.39% 14.46% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Bank Of Baroda (K) Ltd 7.97% 8.58% 9.73% 10.35% 10.85% 0.00% 0.00% 0.00% 0.00% . . Bank Of India 7.04% 7.72% 8.73% 8.21% 7.13% 0.00% 0.00% - - . • Barclays Bank Of Kenya 15.29% 16.09% 15.37% 14.14% 14.95% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Citibank-NA 6.25% 7.30% 9.94% 10.24% 9.36% 0.00% - - - . . Credit Agricole Indosuez 7.27% 8.65% 9.98% 10.61% 10.67% 0.00% - - - - . Delphis 10.24% 13.58% 17.78% 37.97% 24.58% 24.32% 31.86% 27.29% 32.35% - . Diamond Trust(K)Ltd 6.71% 17.02% 15.78% 15.35% - 2.55% 4.91% 5.40% 0.00% . • Euro/Daima Bank 8.28% 12.55% 14.81% 29.43% 23.32% 0.00% 0.00% - - - . First American Bank 9.05% 9.72% 9.34% 10.75% 10.65% 0.00% 0.00% 0.00% 0.00% - . Giro Commercial Bank 6.24% 6.29% 6.94% 7.04% 5.68% 0.00% 0.00% - - 0.00% 0.00% Guardian Bank Ltd 7.01% 6.50% 6.56% 3.96% 2.50% 0.00% 0.00% 0.00% - . . Habib Ag Zurich 7.80% 8.44% 11.67% 14.95% 9.62% 0.00% - - - • - Kenya Commercial Bank 13.48% 12.78% 11.65% 10.96% 12.62% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% National Bank Of Kenya 10.14% 7.34% 9.32% 4.73% 10.04% 0.00% 0.00% 0.00% 0.00% 0.00% - National Industrial Credit Bank Ltd 10.16% 12.64% 19.66% 26.04% 11.75% 0.00% 0.00% 0.00% 0.00% 0.00% - Paramount/Universal Bank Ltd 6.77% 6.70% 13.62% 31.60% 11.77% 9.73% 11.53% - - - - Southern Credit Banking Corp Ltd 5.67% 11.20% 16.46% 28.08% 2.27% 0.00% 0.00% - - - - Stanbic Bank Kenya 5.46% 5.23% 12.76% 18.18% 6.18% 0.00% 0.00% 0.00% - - - Standard Chartered {K} Ltd 11.91% 12.51% 16.20% 20.86% 15.39% 0.00% 0.00% 0.00% 0.00% 0.00% 0 00% Trans National Bank Ltd 19.71% 9.64% 9.39% 8.59% 11.78% 0.00% 0.00% 0.00% 0.00% - * - Trust Bank (K) Ltd - 12.72% 10.08% - - 0.00% 0.00% - - - - Industry Average 9.07% 10.16% 12.09% 15.83% 11.28% 1.66% 2.54% 2.51% 2.94% 0.00% 0 00%

Page 56 Table 5 (c) Equity multiplier:Total Assets/Total Equity Capital(Times)

INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Commercial Bank Of Africa Ltd 8.57 7.69 7.97 8.74 7.83 7.96 7.91 - - - - Bank Of Baroda (K) Ltd 9.99 9.09 9.18 9.54 7.49 9.17 10.13 - - - ■ Bank Of India 9.98 10.15 8.14 9.17 7.03 7.32 2.68 - - - - Barclays Bank Of Kenya 6.46 6.80 7.93 8.61 8.82 9.20 10.19 12.28 17.74 - 10.62 Citibank-NA 6.90 16.57 6.67 6.63 7.33 6.66 - - - - . Credit Agricole Indosuez 8.01 8.89 7.64 10.82 13.19 13.81 - - - - - Delphis 2.64 42.40 7.42 9.17 11.04 9.63 8.72 10.91 9.50 - - Diamond Trust(K)Ltd 4.42 4.22 5.27 6.78 9.01 7.46 8.11 8.23 6.68 - - Euro/Daima Bank 31.67 11.49 9.97 6.78 6.77 6.43 7.51 - - - - First American Bank 5.58 5.42 5.87 6.45 7.39 8.22 10.11 - - - - Giro Commercial Bank 10.98 11.39 10.86 11.62 12.82 7.93 13.45 - - - - Guardian Bank Ltd 5.71 6.99 7.61 10.06 18.79 6.90 - - - - - Habib Ag Zurich 9.93 10.74 11.34 10.76 11.13 11.45 - - - - - Kenya Commercial Bank 7.78 9.11 8.51 7.63 7.46 8.38 9.02 13.30 12.05 - - National Bank Of Kenya 9.79 11.21 11.86 6.00 8.72 7.84 6.10 6.01 - - - National Industrial Credit Bank Ltd 3.49 3.24 3.53 3.98 4.71 6.92 7.28 9.26 7.68 11.90 - Paramount/Universal Bank Ltd 5.07 5.62 5.26 9.28 7.73 8.06 7.57 - - - - Southern Credit Banking Corp Ltd 2.61 3.76 6.31 9.02 9.61 9.10 12.52 - - - - Stanbic Bank Kenya 8.93 7.49 7.03 6.78 7.28 7.09 8.05 - - - - Standard Chartered {K) Ltd 9.39 7.95 9.46 9.48 10.14 11.08 12.78 14.18 13.37 - • Trans National Bank Ltd * 2.30 3.12 *3.30 3.54 '3.67 3.39 2.23 - u - - Trust Bank (K) Ltd - 3.62 17.17 - 23.95 18.97 15.12 - - - - Industry Average 8.11 9.41 8.10 8.13 9.63 8.77 8.39 9.27 11.17 11 90 5 31

Page 57 Table 6 (d) Asset Utilisation: Total IncomerTotal Assets

INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Commercial Bank Of Africa Ltd 11.69% 14.37% 17.35% 19.38% 22.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Bank Of Baroda (K) Ltd 12.12% 13.18% 14.82% 18.10% 26.26% 0.00% 0.00% 0.00% 0.00% - - Bank Of India 10.88% 12.01% 13.32% 16.67% 15.54% 0.00% 0.00% - - - - Barclays Bank Of Kenya 17.27% 18.51% 18.04% 19.98% 20.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Citibank-NA 8.90% 11.02% 14.28% 17.37% 20.47% 0.00% - - - - - Credit Agricole Indosuez 11.51% 13.83% 14.11% 19.18% 19.55% 0.00% - - - - _ Delphis 22.05% 13.93% 17.87% 29.53% 19.55% 0.00% 0.00% 0.00% 0.00% - . Diamond Trust(K)Ltd 11.21% 17.25% 16.23% 25.12% 22.39% 0.00% 0.00% 0.00% 0.00% - . Euro/Daima Bank 18.26% 19.97% 22.31% 30.51% 29.74% 0.00% 0.00% - - - . First American Bank 13.63% 16.21% 15.58% 23.05% 22.79% 0.00% 0.00% 0.00% 0.00% - - Giro Commercial Bank 14.15% 15.12% 17.04% 25.46% 21.93% 0.00% 0.00% - - 0.00% 0.00% Guardian Bank Ltd 13.19% 14.10% 14.89% 13.84% 11.61% 0.00% 0.00% 0.00% - - - Habib Ag Zurich 12.18% 13.54% 11.67% 14.95% 15.04% 0.00% - - - - - Kenya Commercial Bank 17.94% 17.69% 19.11% 22.65% 23.29% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% National Bank Of Kenya 14.27% 13.22% 16.37% 22.01% 20.92% 0.00% 0.00% 0.00% 0.00% 0.00% - National Industrial Credit Bank Ltd 13.48% 17.17% 19.66% 26.01% 27.08% 0.00% 0.00% 0.00% 0.00% 0.00% -

Paramount/Universal Bank Ltd 14.43% 11.42% 9.67% 10.64% 6.90% 0.00% 0.00% - - - - Southern Credit Banking Corp Ltd 10.68% 21.45% 16.61% 27.88% 10.24% 0.00% 0.00% - - - - Stanbic Bank Kenya 11.14% 11.32% 12.76% 18.18% 16.14% 0.00% 0.00% 0.00% - - - Standard Chartered {K} Ltd 14.44% 15.17% 16.20% 20.86% 21.64% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Trans National Bank Ltd 31.80% 24.32% 28.82% 23.15% 25.15% 0.00% 0.00% 0.00% 0.00% - - Trust Bank (K) Ltd - 20.05% 11.56% - 0.00% 0.00% 0.00% - - - - Industry Average 14.53% 15.68% 16.28% 21.17% 19.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Page 58 Table 7 (e) Profit Marqin:Net Income (before TaxVTotaI lncome%

2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 INSTITUTION

Commercial Bank Of Africa Ltd 27.16% 21.34% 19.03% 23.96% 28.86% ------Bank Of Baroda (K) Ltd 11.21% 10.78% 9.63% 10.19% 9.35% ------Bank Of India 27.88% 31.62% 34.71% 17.53% 20.62% ------Barclays Bank Of Kenya 33.30% 23.30% 26.89% 30.17% 32.68% - - - - . . Citibank-NA 28.33% 26.40% 26.86% 26.75% 19.97% ------Credit Agricole Indosuez 9.45% 8.58% 23.77% 12.61% 4.76% ------Delphis Bank -131.06% -147.05% 4.59% 2.14% 5.25% - - - - - . Diamond Trust(K)Ltd 8.23% 22.42% 15.93% 12.86% 12.94% ------Euro/Daima Bank 29.07% 10.62% -21.96% 8.61% 12.16% ------

First American Bank 26.06% 13.27% 23.03% 16.06% 29.43% ------Giro Commercial Bank 5.15% 3.25% 2.66% 3.24% 6.16% ------Guardian Bank Ltd 11.72% 9.38% 6.38% 5.95% 9.44% ------Habib Ag Zurich 26.40% 25.30% 23.63% 25.16% 25.68% ------Kenya Commercial Bank 3.16% 5.90% 15.57% 7.86% 24.17% ------National Bank Of Kenya 9.41% -51.18% -84.43% -50.70% 10.70% ------National Industrial Credit Bank Ltd 33.27% 35.29% 32.51% 22.83% 27.13% ------Paramount/Universal Bank Ltd 6.12% 10.18% 14.79% 13.41% 5.36% ------Southern Credit Banking Corp Ltd 2.59% -4.18% 1.81% 1.38% 2.46% ------Stanbic Bank Kenya -39.84% -54.89% 3.85% -32.14% 10.66% ------Standard Chartered {K} Ltd 40.97% 42.51% 37.04% 28.95% 25.29% - - - - - Trans National Bank Ltd 43.76% 6.61% -38.38% 2.36% 6.89% ------Trust Bank (K) Ltd Industry Average 10.11% 2.35% 8.47% 9.01% 15.71% ------

Page 59 CAPITAL ADEQUACY RATIO

Table 8 (a)Capital Adequacy: Shareholder Funds/Total Deposits0/**

INSTITUTION 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Commercial Bank Of Africa Ltd 14.10% 16.29% 14.96% 13.44% 15.87% 15.35% 15.27% 0.00% 0.00% 0.00% . Bank Of Baroda (K) Ltd 11.52% 12.85% 12.75% 12.40% 16.30% 13.44% 10.22% 0.00% - . - Bank Of India 14.72% 12.30% 15.79% 12.33% 25.51% 16.63% 50.73% - - - - Barclays Bank Of Kenya 20.07% 19.47% 16.22% 15.94% 15.21% 14.77% 12.60% 10.56% 6.23% 0.00% 10.15% Citibank-NA 19.30% 11.61% 21.92% 20.83% 17.18% 20.13% . - - . - Credit Agricole Indosuez 18.97% 13.80% 16.75% 10.79% 9.52% 8.65% - - - . - Delphis 30.43% 2.46% 16.27% 12.74% 10.37% 12.27% 13.65% 10.85% 12.49% - - Diamond Trust(K)Ltd 32.14% 33.33% 25.14% 18.47% 13.43% 16.43% 14.99% 15.72% 20.46% - 0.00% Euro/Daima Bank 4.48% 9.99% 12.22% 18.35% 18.63% 20.08% 15.96% 0.00% 0.00% - - First American Bank 24.00% 23.02% 21.09% 19.04% 16.58% 14.65% 11.68% 0.00% 0.00% 0.00% Giro Commercial Bank 10.43% 9.95% 10.50% 10.35% 9.30% 8.33% 8.55% 13.01% - - Guardian Bank Ltd 21.99% 18.33% 17.71% 17.68% 12.55% 36.89% - - - - Habib Ag Zurich 11.97% 11.07% 10.73% 14.59% 10.83% 11.67% 6.68% - - - Kenya Commercial Bank 17.89% 16.47% 15.92% 19.04% 17.36% 14.93% 13.95% - - - National Bank Of Kenya 14.12% 10.92% 9.87% 15.00% 14.52% 16.97% 17.04% 23.04% 0.00% 0.00% National Industrial Credit Bank Ltd 43.24% 48.82% 43.62% 36.25% 28.95% 22.00% . - - - Paramount/Universal Bank Ltd 25.97% 22.59% 24.20% 13.38% 16.23% 14.74% 15.59% - - - Southern Credit Banking Corp Ltd 68.14% 47.37% 18.24% 12.80% 12.17% 13.05% 9.06% - - - Stanbic Bank Kenya 13.43% 16.31% 17.07% 18.68% 15.28% 8.48% 9.41% 0.00% - - Standard Chartered {K} Ltd 12.87% 15.73% 12.94% 12.99% 12.28% 11.27% ’ 9.88% - - - Trans National Bank Ltd 45.17% 16.30% 14.98% 15.94% 23.61% 0.00% 0.00% 0.00% 0.00% - Trust Bank (K) Ltd • 77.17% 67.55% - - 0.00% 0.00% - - - Industry Average 23% 21% 20% 16% 16% 14% 13% 7% 5% 0% 5%

Page 60 TIMES APPENDIX III TREND IN COMMERCIAL BANKS FINANCIAL PERFORMANCE FINANCIAL BANKS COMMERCIAL IN IIITREND APPENDIX Equity multiplier:Total Assets/Total Equity Capital(Times) Equity Assets/Total multiplier:Total Equity Page 61 Page PERCENTAGE Total Liabilities/Total Assets - ^ - R e t u r n on Equity: Net Income/Total Equity Capital Equity Income/Total Net Equity: on n r u t e R - ^ - Assets Liabilities/Total Total TRENDS IN COMMERCIAL BANKS FINANCIAL PERFORMANCE FINANCIAL BANKS INCOMMERCIAL TRENDS Page 62 Page YEAR PERCENTAGE 25.00 20.00 15.00 10.00 5.00 0.00 1991 CptlAeuc: hrhle ud/oa Deposits Funds/Total Assets Shareholder Income/Total Adequacy: Total •Capital Assets Utilisation: •Asset Funds/Total •Shareholder 1992 trends 1993

in

commercial 1994 1995

banks Page 63 Page YEAR 1996

financial •Profit Margm:Net Income (before TaxyTotal Income Income TaxyTotal (before Capitai(Times) Equity Income Margm:Net Assets/Total •Profit multiplier:Total •Equity 1997 Return on Assets Net Income (before TaxyTotal Assets TaxyTotal (before Income Net Assets on Return

efr ance perform 1998 1999 2000

2001 000 0 0 5 20.00 25.00 10.00 15.00 I "